Gu Yanxi: The SEC's supervision

On April 4th, US time, American exchange holding company Miami International Holdings announced a strategic cooperation with Templum. The two will jointly establish a regulated exchange, list and trade digital securities. The exchange will submit an application to the SEC for approval. This is the second cryptographic digital asset trading institution working with a formal exchange to jointly apply for a new digital stock exchange.

Previously, tZERO had already established an exchange with BOX to focus on digital securities, and has already applied to the SEC for this purpose. The application of these two new digital stock exchanges will further force the SEC to re-examine the current relevant securities regulations in order to decide whether to modify existing regulations that do not match the digital securities, or to require these new digital stock exchanges. The existing regulations operate as if it now require ST to finance and trade under the relevant regulations of alternative assets. In my opinion, the probability of the first situation occurring is much greater than the second case.

The SEC is currently facing a very embarrassing situation. The rapid development of the market is requiring it to develop new regulations as early as possible to regulate the disruptive changes in blockchain and encrypted digital assets in the securities industry (see my article "Why STO will definitely replace IPO" ). But on the other hand, because of the breadth and depth of this change, especially because this change is still going on, it is difficult for the SEC to quickly develop sound regulations to regulate a rapidly growing market. At present, the SEC can only continuously explain and emphasize the possible securities attributes of the certificate, and require that the securities that belong to the securities operate in accordance with the securities regulations.

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The impact of blockchain technology and encrypted digital assets on the securities industry is greater in both breadth and depth than any previous technology, including computer technology. It has brought about tremendous changes in financing tools, financing stages, financing processes, investor qualifications and geographic scope, market structure and market participation agency functions. The stable development of the securities industry is the basis for the stable development of society. Therefore, the SEC, like other legal jurisdictions, faces enormous challenges in this regard.

Market structure

In the era of blockchains, the formation of digital assets began with company registration. The Delaware government is now legally recognizing the company's equity registration on the blockchain. In other words, the company's initial share registration can be completed on the blockchain. After registration, the company's equity can be sold on the same chain through private placement. Therefore, the current ST publishing platform can build functions on this chain to complete the private equity issuance process.

In terms of trading functions, this chain will certainly support decentralized exchanges and centralized exchanges. In the private equity stage, equity owners can conduct small-scale equity transactions with each other through decentralized exchanges. In the public offering phase, this chain will support the matching transaction of the centralized exchange, and then complete the corresponding clearing and settlement on this chain. The user's assets are either stored directly in the chain's own digital currency wallet or entrusted to a centrally managed custodian for custody.

The current registration and custody of equity in listed companies in the United States is done in a centralized company, DTCC. However, due to the emergence of blockchain technology, the possibility of custody can start from the company's equity registration, so the scope of the custody company's business has expanded. In addition, since equity is managed in a distributed manner on the chain, is there still a need for a unique monopoly hosting company? The technical bottom layer of the blockchain is actually supporting the competitive hosting services on top of it. of.

For the two newly applied digital stock exchanges, what kind of digital securities custodian should they cooperate with? The SEC’s answer to these questions is not only for the two exchanges, but for the securities market. basic structure.

2. Financing stage

The financing based on practical certificates allows the market to see a powerful force based on the financing of the pass. From the perspective of the financing phase, this type of financing is financing in the very early stage of the company, which is similar to the financing stage of crowdfunding in terms of stage. The difference is that it is more effective than crowdfunding financing. So should regulatory rules be developed to promote more efficient financing at this stage?

In the context of the linkage between primary and secondary markets, CIS-based financing is more efficient than existing equity-based financing. Due to the convenient circulation of the certificate on a global scale, this allows it to immediately trade in the secondary market after it is issued in the primary market, and the market determines the value of the company. Stock-based financing, usually after several rounds of private placement financing, can only be publicly offered for trading in the secondary market. So, can we lower the threshold for public offerings to allow more companies to issue public offerings in the early stages?

For exchanges, they certainly want more companies to list to generate more trading volume, but the SEC needs to decide at which stage the company needs to meet the conditions to trade on these new digital stock exchanges. In this respect, it is obviously not possible to comply with the existing conditions for listing securities. But can the SEC more effectively promote the formation of capital in the early stage of the company while protecting the fairness and stability of the financial market? Promoting the formation of capital is one of the three duties of the SEC.

3. Institutional functions

The application of blockchain technology in the field of clearing and settlement will directly impact the existing secondary clearing market structure. Blockchain technology supports direct clearing and settlement between users, so the current clearing function of brokerage clearing members is not required. Not only that, but the functions of the current clearing company will also change dramatically. Its current data processing and operation and maintenance work will be directly replaced by the blockchain. The functions of the clearing house will be transferred to the formulation and maintenance of liquidation rules and the control of market risks. Due to changes in the functions of these brokerage clearing members and clearing companies, the corresponding regulatory requirements will therefore need to be changed. So in the era of digital securities, what should be the more accurate functional positioning of brokers and clearing companies? Even the more radical question is, is there still a level of brokerage?

4. Investor qualifications and scope

After the establishment of the new digital stock exchange, users who participate in digital securities trading cannot be qualified investors. In this regard, the SEC needs to re-establish the standards required by investors.

Nowadays, due to various factors such as regulatory laws, information circulation and transaction convenience, there are limited transactions covered by exchanges in a legal jurisdiction. In the past few years, the emergence of encrypted digital currency exchanges has allowed the market to see the geographic extent of traders who can participate. The emergence of digital stable currency has accelerated the global trading of encrypted digital assets due to its ease of access and use and its acceptable range in the global market. In fact, the main use scenario for digital stable currency is the transaction of encrypted digital currency. Digital stock exchanges can therefore cover traders around the world like encrypted digital currency exchanges. The SEC's regulatory regime for the securities market must therefore be adjusted accordingly to regulate and support rather than limit this trend.

In the regulation of digital securities, some other jurisdictions in the world have adopted a sandboxing method to limit the application of blockchain technology and encrypted digital assets in the securities industry to a limited extent. These areas are Australia, the United Kingdom, Singapore and Hong Kong. Given the breadth and depth of this change, I think this is a very viable regulatory approach. After all, neither the market nor the regulation can know the final state of the change, so it is very feasible to observe its development within a controllable range. The SEC should also consider adopting such measures. After all, it is impossible to meet the development needs of the market by simply emphasizing the existing securities regulations.

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